Learn how Tony LeBlanc has built his process for increasing rent every year with his tenants – without the uncomfortable battles, struggle, or painful negotiations – and has turned it into an opportunity to facilitate great customer service. Tony shares some fantastic mindset & philosophy that would make any owner trust him with their property – you are sure to get some valuable insights.

Show Notes:

Tony had large property management growth in mind from the beginning [03:01]

Resources:

Transcript:

Jason: Welcome! If this is your first time listening, then thanks for coming. The DoorGrow Show is a podcast for residential property management entrepreneurs that are interested in growing their business and life. If that is you, be sure to subscribe and rate us in iTunes and join your fellow DoorGrow Hackers online at doorgrowclub.com, a free community for property management entrepreneurs. I’m your host Jason Hull, the founder of OpenPotion, GatherKudos, and of course, DoorGrow. Now, let’s get into the show.

Okay, this is episode number four of the DoorGrow Show. In today’s episode, we’re gonna be talking with Tony LeBlanc of Ground Floor Property Management about rent increases and how to handle those properly. Let’s get into it.

Today we have Tony LeBlanc here with us of Ground Floor Property Management. Tony, tell everybody a little bit about yourself and where you’re at.

Tony: Sure. Thanks, Jason. I just stated, my name is Tony LeBlanc. I am located out in the east coast out here in Canada. I run a management firm for probably about the last seven years now. Currently with two locations, one in Moncton, New Brunswick and another one in Prince Edward Island, Canada.

We have, as of today, probably around 1300 doors, 1400 doors between the two locations. We’re just always growing. The last few years have been really, really good in terms of growth. We’re continuing to get into new markets right now and different types of product.

Traditionally, we have been experts in large multifamily. We’re starting to dabble a little bit more into single family just because of the market condition in our area. But we kind of dabble in all the different sectors, different sizes.

Jason: Cool. Give people an idea on how big your company is.

Tony: Our main location, I think the last count was around 22 employees. About $1 million a year type of operation. A fairly decent size for a property manager. Typically in this business you see a lot of managers out there with maybe three or four employees with a few hundred doors.

Right away, when I started the company, that was not my ambition. I knew I wanted to go big and we’re now starting to see that growth and getting into different cities is our next cue.

Jason: Alright. The reason I brought Tony in and wanted to interview him is one, we have met. He was curious about what we do and we have been chatting. But also we’re connected on Facebook through common Facebook groups and stuff. He had posted a video about rent increases.

I don’t do property management. I provide services for property managers but I love hearing new ideas. I haven’t heard too many people talk about rent increases, especially in the single family area, but I’m sure it’s something that every property manager deals with and struggles with. Explain to me the challenges with rent increases that property managers deal with.

Tony: The biggest issue with rent increases, especially in the different markets, I’ll take for example if you own some properties in the down market where the vacancies are high, high turnovers, there’s a huge fear with property owners and some property managers that prevent them from increasing their rents or sticking to their guns and doing their rent increases because of the fear of loss. Their fear of losing the tenants and just having more vacancies and higher turnovers. They’d let this go on depending on how quickly the market can rebound. At the same time providing incentives and different things to get new tenants in, it’s another disaster waiting to happen on that rent load. It can really, really hurt you in the long term.

Jason: Tony, on the subject of rent increases, you’ve mentioned some of the problems property managers have fears regarding this. The owners of the properties have fears regarding this. The tenants are afraid of rent increases too. If everybody’s afraid of all this, I’m guessing that most property managers, or a lot of property managers just try to avoid raising the rent.

Tony: A lot of them do, yes.

Jason: I would imagine what the problem then happens if you’re only keeping on a door for maybe three, maybe five years or whatever the case may be, whatever the lifetime value is in their market typically. At some point they’re thinking, “I need more rent.” Maybe the tenant leaves.

Then, unless they’re selling the property, their only option then, they might be thinking, “I need new property manager. Somebody that’s gonna evaluate this.” You’re losing out on opportunities. How do we solve this problem?

Tony: I’ll give you a kind of a great way of summarizing. I’ll give you a quick example. We have an owner, smaller property, six units, multi-unit, she’s had it for years. It’s paid off. It doesn’t have a mortgage on it. Calls us up the other day and says, “Guys, I’m looking to sell. Let’s have a chat. Review the numbers. Let me know what you think I can get out of it.”

Putting all the numbers in my spreadsheet, lo and behold, the property’s completely upside down. Heating costs and utility costs on the property are way out of line. He hasn’t done an increase in over 10 years. His building is just underperforming. The cap rate and the valuation was so low that we told him I don’t know how to price this because if any investor looks at it without a mortgage, it had a negative cash flow.

Jason: It’s basically becoming a bigger problem for 10 years because now he’s got a whole bunch of tenants that really couldn’t afford to live there normally. Now, he’s made this problem that in order to raise the rent, he’s going to have to do it on each new lease, basically have tons of turnover.

Tony: Yeah. You can’t just do that. In any different jurisdiction that you’re in specifically here if I use the example, I have to give my tenants usually at least a three or one month notice of a rent increase. We’re lucky here we can kind of do it anytime throughout the lease but you still have to give them notice.

But even doing at that point he was so far back, his rents are five to seven years old. It would take him five years of increases at probably 10%-15% to get his rent up where he need it to be in order for the rent roll to even cash flow positive. That’s how in the hole he got.

Jason: Man.

Tony: Bad situation to be in. There’s a direct correlation, I believe, from rent increases and the way that a property is maintained. This particular building, everytime we have to do work in there, it was a bit of a struggle to agree whether we have to rip out carpets, put some new laminate flooring down, get a stove replaced. Kind of minor things that need to be done over the years. It was always, I don’t wanna say a fight, but it required multiple discussion. The reason being is cash flow wasn’t there. Everytime we had to do a repair, it was an out-of-pocket expense to him. I can’t blame him.

Jason: This is a really good example of the cycle suck which I talk about sometimes. You’ve got this property, it could have been at one point a really great property, it could be a great property. The problem is a good property becomes a bad property if it has a bad owner. If the owner kind of puts the clamp down and doesn’t allow you to do certain things, then either your option is to baby them and give them what they want or to fire them or to challenge them to do it our way or the highway.

The cycle of suck, for those who haven’t heard this before just real quick, basically if you take on crappy clients then you’re crappy owners, and then you’re going to have crappy properties even if the property’s good. It will be a crappy property even if it’s immaculate, beautiful single family home. If the owner’s not willing to fix things, always pushing back, making things difficult, etcetera, for you to manage it. It takes a lot more time, energy, and resources to do it. A lot more staff. It’s a higher cost for you to manage this property.

A good property is really easy to manage but one bad property could take just as much time as 10 maybe even 100 good properties depending on how bad the situation is. You have bad owner, bad property. What kind of tenants you’re gonna have? Well, they’re gonna be crappy tenants because they’re gonna be upset, they’re gonna be frustrated. You then become this shit-shield for a slumlord, essentially. Which just sounds like what you’re describing. Then, what kind of reviews does the property management company get because you’re the one all the tenants are focused on negative reviews. Then the cycle continues. Because if you have negative reviews online, what kind of owners you’re gonna attract, more of those types of owners. It all starts with being picky about the types of clients you allow to stay in your portfolio or you bring on. What’s the light at the end of the tunnel here?

Tony: I think what happens is a lot of property owners, real estate investors sometimes forget that these buildings, I look at each one of our buildings as a little mini business. They’re are set of books that we account for in a monthly basis. They have income, expenses, and they have people. To me, that’s a definition of a business. One of the major goals in any business is to always have your income increase over time and decreased your expenses as much as possible. Most property owners, again, I alluded to in the article, there’s so much focus put on decreasing cost and watching cost which is great. Don’t get me wrong. But a lot of people take their eye off the ball in terms of that income. They get in a comfortable position. Market is dictating this. They’re a little gun shy and they don’t wanna disturb anything. That’s kind of how they get into this situation.

Jason: This is one of the reasons people hire a property manager because they don’t wanna have to deal with this emotional issue of raising rent and being the bad guy in their mind.

Tony: We have a strong belief in our firm that it all starts on the day that that lease is signed with that tenant. All of the expectations, all the courage can be put on the table so there’s absolute transparency between us, the property managers, and the tenants. Where I live and where we operate, we have a section on our leases that specifies are you going to be raising the rent within this term of the lease, we always put a clause in there that specifies that the rent will be increasing so that the tenant is prepared that following year on the renewal of their lease that they know, “Okay, there’s gonna be an increase coming.” We always tell them that it’s never going to be a huge jump, $50, $100, $200 rent increases. Our market can’t sustain that. Our market, it’s $5, $10, $15. Most people can handle that without any objections. What’s happening now if for the people that are this particular example that I gave you with a six unit, he asked us on the phone, “Can we do a $50 or $75 increase?” I’m like, “You can but you’re probably gonna have the building empty out. You have to expect that.” It’s too much of a hit when you’re paying a $600 rent, increase it by $75.

Jason: Yeah, that’s a big percentage.

Tony: Our regulations, we can do it as landlords. I can double the rent if I wanted to. We have no limits on our increases. But at the end of the day, we just couldn’t do that, it wouldn’t be the right thing to do. Not starting out right and not doing these regularly yearly increases put you in that bad position two or three years down the road where you’re like, “Geez, I gotta do a big increase to catch up.” Then who’s on the bad end of it, it’s gonna be the tenant.

Jason: Part of what you’re saying is to make sure to manage the expectation with the tenant from the very beginning. It’s in your contract with them. It sounds like you verbally go over this with them to make sure that they hear this.

Tony: Absolutely.

Jason: I found with contracts, the big downside of contracts, is they don’t matter until it’s too late. You’re in a legal dispute or you’re at war. My rule with contracts or proposals or any quotes or anything like that is it’s not what people think it says. It’s what they heard you say that matters because it can be in there.

But it doesn’t matter until it’s already too late and there’s a problem. You need to verbally go over this with them that there’s going to be rent increases to prepare them for that. In regards to that, how long do you usually spend with the tenant going over the lease? Some people just send out a lease and just sign this or just have them sign it.

Tony: No. For us, signing a lease is probably one of the biggest and most important parts of the entire experience for a tenant. This is where they really get to sit down and get to know you as a property manager as a landlord. Our average time is a little half hour to an hour going through each lease. They come into our office, we prepare two sets of documents for them to review. We go through each clause with them explaining what they mean, go over details. In addition we have what we call a Schedule A which is basically a listed rules and regulations of that property. Because the rules are different in a single family home versus a 54-unit apartment building. Whether it’s a condo, we have to explain to them by-laws and all these different things.

Signing that lease is crucial for us. We have to make sure that they understand everything. They sign off on it, they initial where they need to initial. Everything is verbally told to them so that they properly understand. That’s step one.

Going exactly to what you just said, we sign year leases, which is a norm in the industry I think anywhere else. They will forget. Typically, if month 12 comes rolling around and we call them the night before and say, “By the way, I need new cheques but don’t forget it’s $20 more.” They’ll be like, “Oh, damn.” It’s like a big surprise. They haven’t mentally prepared for it or maybe some need to financially prepare for it. We have a process that we call all of our tenants 90, 60 days before the end of their terms for every lease. You wanna know how things are going at the 90-day lease, kind of touch base with them, see how things are going. 60 days you wanna find out what they’re doing, are they renewing. That’s where we kind of start alluding to the fact that if you remember, we had a rent increase from day one and it’s gonna be effective as of two months from now if we have to adjust any payment plans.

Jason: You’re preparing them for the blow. You’re letting them know, “Hey, this was coming,” and you actually have called through all of these. You have how many units total? Around 1300?

Tony: 1300.

Jason: 1300 phone calls a year just to notify on rent increases? Wow.

Tony: No. The purpose of the call is not just for rent increases. It’s a touch point. It’s customer service. It’s tenant retention. Call them, “How are you doing? Is there anything that we need to look at?” There’s many great things. A lot of property managers I think have that wrong. I think you should be talking to your tenants.

Jason: It’s a preparatory thing also to find maybe maintenance issues, hear concerns, and maintain and keep these tenants especially if they’re good. Love it. It increases your availability then which is the hallmark of customer service. It’s foundational. Accuracy and availability. By being that available, your accuracy is going to go up as well. Love it.

Tony: Yeah, they appreciate the call. They appreciate that reminder. Again, you don’t wanna be put in a position where the tenants feels they’re being blindsided, “Oh, they’re just always after my money.” If you prepare them they’re not gonna feel like…

Jason: The call might be, “Hey, this is Sue over at GroundFloor. Just reaching out to let you know that you’re at this stage in your lease and here’s some things that are coming up and I wanted to find out from you how the property is.” Does your team have a list of things that they go through then on each of these call? How do you know when 60-90 days is coming up? How do you logistically manage that?

Tony: All of our staff in-house are getting certain tasks. This particular task is assigned to one of our admins. Every month, that’s part of one of her duties is to print out the different lease ending dates through our management software, it very nicely puts in her dashboard all the leases that are 90-60 days. She prints them out. She calls them. She does her thing. It’s very, very systemic.

Jason: Some people might think, “I don’t have the bandwidth to do that. I don’t have Tony’s team. I’m a small property manager. Do you think it would be as effective to use email or things like that or probably not?

Tony: I think it could work. I think email could work. The calls are not lengthy, they’re a few minutes. I think they’re important enough to warrant a phone call. If you cannot reach them then yeah, we do…

Jason: What about inspections at those times? Would this be a time to also bring this up again or is that not generally the case?

Tony: No, it’s a different staff that will be handling that type of stuff. This would be mostly administrative.

Jason: Okay. If they were a smaller property management and they’re doing just about everything then that might also dual purpose then.

Tony: I think the smaller you are, the more touch points they have with their tenants anyway. I remember when I only had a few hundred doors, I knew every tenant by name. I spoke to them. I was always at the buildings. You have less overhead. You have less staff to worry about and do. The touch point with a smaller property manager is much higher than probably someone…

Jason: Yeah. There’s a natural barrier to feedback that happens as you grow and as you build out a team which is one of the reasons that we have the GatherKudos tool that we have for reputation. Same thing with my own business. As soon as you have a team, you instantly have a barrier to feedback even if your team’s small because they’re the ones touching the customer, not you. They might be touching them in a nice way and they might not be. Good point.

You mentioned item one, make sure that you get over this from the get go with the tenant. Two, make sure that you let them know that it’s coming, doing these calls. What about on the owner side? Because you mentioned in the beginning the owner challenge and is there any other stuff that you do with the tenant in that regard before we move on to that.

Tony: Pretty much once the touch points have been made, we try to go for the 80/20 rule in this case. You’re not gonna probably be able to get 100% increases in place. You are going to get challenged at some point in time throughout different tenants whether it’s a financial issue, they just can’t afford it.

You’re gonna bend in certain circumstances if you’ve had a tenant there for 10 years and something happened where he just really, really cannot afford this extra $15 a month in rent. That’s where we have to be a little bit more compassionate, realistic about the situation. We’re not gonna go out and throw somebody out just because of that.

An 80/20 rule is probably a good way of seeing the end result. There’s really no other discussions from the tenant except for if there’s any going back and forth. We would usually speak with them just before the actual increase takes place. Because either we have to get a new post dated cheques if that’s how they pay or if they’re in some some sort of pre-authorized payment system. We’ll probably advise them a few days before that rent’s come out just to let them know, “Listen, don’t forget your rent has increased this month by $15 so you’re gonna see that difference debited in your account.”

Listen, at the end of the day, 95% of my portfolio I manage for property investors out of province and out of country for a lot of cases. They’re relying on us as property managers to make the right decisions. Personally, here in our market, we have just gone through three of the worst years in over 40 years in our market. Incredible amount of new units being put on the market which was driving the rents down and causing a lot of vacancies in the older units that weren’t kept up. We had a number of those types of units.

Unfortunately, there were a lot of circumstances where raising the rents just wasn’t doable. You’re gonna run into that. From an owner perspective, it’s just really a matter of again, communication is key to this industry. If you’re not communicating with your staff, your tenants, and your owners, you will be out of business pretty quick.

Communicating the income challenges, personally, what we do with our business is many of our large owners are the owners that request that we have monthly financial meetings with them to review the income and expenses of their properties and forecast.

Again, you’re running a business. These are discussions that you have to have with your owners. A lot of them we pre-plan for the following year, “What’s my utility cost? My heating cost has gone up by 3%. My property taxes have gone up. My insurance have gone up.” What is that going to equate in terms of the rent increase that I need to be able to…

Jason: It sounds like if you keep the owners really well-informed, you’re communicating with them. If you’re establishing yourself as an authority, they’re trusting you to manage this investment for them. If you run it like an investment and run it like a business most of the time, they’ll probably go along with the advice you’re going to give them especially if they feel you are the expert.

I think where a lot of property managers or business owners in general run into a problem is where they no longer have the confidence or display the confidence that they’re the expert at what they do. As soon as people catch wind of that or they smell that or whatever, they start to micromanage you. They start wanting to make all these changes.

Tony: The old philosophy, many property managers still adhere to this, and I personally can’t stand it is no news is good news. I think the old school thought in the property management industry is, “I buy a building. I get a property manager. I collect my cheque every month. Don’t call me unless the building’s on fire.”

Personally, I have a hard time with that. I like communicating with my owners. I like telling them what’s going on even if it’s a one-way street. I’m covering myself. We do all sorts of things in terms of monthly financial reports, newsletters that we provide to our tenants, monthly general updates of the market conditions, seasonal emails letting them know what’s going on with the market.

They need to hear from you or else, exactly what you said, they will lose faith in your ability. If they haven’t talked to you in six months or a year and all of a sudden a problem comes up, they’re gonna say, “You suck. What are you doing? You’re horrible.”

Jason: Did you say you came from the IT background? I was pretty nerdy myself in the IT industry which I hated doing IT. It’s the same sort of thing. I realized pretty quickly that in IT, if you’re doing a job really well, nobody notices you. Everything’s working. Computers are working. Networks are working. Servers are up. Everything’s great. Nobody notices you. They think you’re doing nothing. Then they start questioning why are we paying you? Why do we need you? I don’t even need you. I can probably do this myself, they would start to think.

I realized really quickly, the only time if there were problems with the server or problems with the property or whatever, if problems come up, then they think, “Oh, you’re not doing your job. You’re not doing a great job. It’s your fault.” If you’re giving them lots and lots of positive touch points and information and letting them know what’s going on and letting them know, “Hey, we’re doing this this month. We’re doing sprinkler clear outs for winter. We’re doing this.”

All the things that you’re doing to make sure that they know that you’re involved and keeping them informed. They’re gonna just sit back and not worry about a lot of times. Probably not contact you. When they start reaching out, I’ve noticed just in my own business, like website projects, if a client’s reaching out to us, that’s an indicator that we aren’t communicating often enough with them about the project or where it’s going. Sometimes people are really impatient.

Our projects go really quickly so we’re communicating a lot. But if we don’t communicate for a few days, they’re like, “What, where is everything at?” We get that a lot. We’re getting a lot of that. It’s a pretty strong indicator. Property managers, if you’re getting lots of contacts from owners saying, “What’s going on with my property?” That’s a negative so you need to be proactively keeping them informed.

This directly relates to what you were talking about in increasing rent. You need to be letting them know that this is coming up. “Hey, I let the tenant know, we called them. We let them know that we did this, we did that.” They’re gonna think, “Man, these guys are on top of it. They’re on top of getting increasing rent which is gonna get me more money or help me maintain the property. I think that nothing shows the owner that you care more about their investment than probably getting them more money.

Tony: Absolutely. Our model at our office within our brand is you need to make an owner feel like an owner. You need to make them like they have a team behind that. That we’re backing them up. We’re providing them with reports. We’re providing them with statistics.

Jason: Make the property owner feel like a business owner.

Tony: In the background working on their behalf.

Jason: Yeah, love it. Cool. Any other challenges that you see in raising rents or that are common or anything we didn’t cover?

Tony: I think, at the end of the day, you need to plan for them. You need to have your systems in place so that they’re automatic. You can deal with the one-off cases as they come and deal with them and look to get an 80/20 rule. If you have it in place, you’ve properly communicated it, everybody’s aware, there’s no big surprises, things are gonna happen, you’re gonna let some slide. But I think, in my opinion, it all starts with that first meeting. The signing of lease with the tenant and the proper expectations have been set in place.

Jason: Have a process. Have a procedure. Then be flexible for the 80/20, for the 20% that may have issues or will fight. Hopefully, everybody watching this will get value out of this and feels a little bit more comfortable increasing rent. If for property managers that have not done this, they’re stuck, they’re already in this situation where they haven’t been doing this, how would you recommend they start doing this just with new contracts? How would they go back to their existing clients and existing tenants to start changing the game?

Tony: Great question. There’s two folds. I think, one, make an adjustments to your sign-up process in terms of your lease signings. Make sure that that’s applicable to all new leases coming into the firm.

With existing tenants, you gotta be careful, I would analyze building or property by property. I would look at the terms, the length that my tenants have been there. If it’s somebody that’s been there five years and the rent hasn’t increased, that should be a pretty easy conversation. I don’t think you’re gonna be challenged if you go to them and say, if it’s $1000 rent, you say, “We need to increase your rent by $10 or $15. It hasn’t increased over the last five years. Here’s been the increase in expenses over the last two years.”

Make sure that you justify. You wanna make sure that your tenants don’t feel like you’re just grabbing for money. Be prepared if they ask. If they ask you, “Why are you raising my rent?” “Well, if you noticed, I just put a new roof on the apartment building or the house. I just replaced all the windows. I just gave you a new fridge and a new stove. I just did all the carpets in the hallways.” Explain to them. They may need to hear it.

Jason: Just another great reason to make sure that the property is well-maintained and that you’re doing things. It’s gonna give you the opportunity to raise the rent and keep the properties at a higher level so that you can continue to attract good tenants. Instead of consistently worse and worse tenants and consistently worse and worse condition of the property.

Tony: At the end of the day, the rent increases are needed in order to run the property. You need that extra income to make sure that you’re keeping up with the property or making sure that all the capital expenditures are being taken care of. Major components, upgrades over time.

A lot of this money is just reinvested back into the property. There’s a way of communicating that with your tenants and making sure that they can feel that, and yeah, as you said, if they’ve been calling you for the last two years to fix their sink and you haven’t gone, you may have some problems getting extra money.

Jason: Yeah. It’d be interesting I think for property managers especially if they’re in the single family home market where there’s probably a lot more property managers doing percentage of rent. There’s a built-in incentive for the property manager then to also increase the rent. It’s a win-win for the property manager and for the property owner to increase the rent. I think if they view you as a partner in that regard, we’re gonna make this money together, and then they’re part owner like you’re talking about.

Tony: Yeah, absolutely. It’s the ABCs of money. One of the first places where you go and look for new money.

Jason: Your number one prospect is always gonna be your existing client. Well Tony, this is really useful, really informational. I think there maybe some other topics that might be worth chatting on in the future. I appreciate you swinging by. I know it’s late over there on the Atlantic coast area.

Tony: New Brunswick.

Jason: Tony, you wanna tell us where people can find your business in case you wanna show this off to your people?

Tony: Sure. Absolutely. Our company website is groundfloorpm.com. You can also find me on LinkedIn or on Facebook.

Jason: We had some technical issues at the end where we were kind of talking over each other. You may have noticed it. I tried to edit it as best I could. Tony’s website is groundfloorpm.com if you wanna check him out. I recommend you do. He’s doing a lot of great things.

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